Lucent's Latest Has Investors Wondering What to Believe

Lucent (LU - Cramer's Take - Stockpickr) the Laggard may have taken one more step down the path of corporate infamy Tuesday.

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Who in the upper echelons of the traumatized telecom gear-maker can we possibly trust, after it said Tuesday that it may have overstated revenue? Questions now hang over the firm's newish finance chief, Deborah Hopkins, who joined in April to bring order and clarity to Lucent's books and mend relations with Wall Street.

Without a dependable reformer at the helm wielding a stiff new broom, and a whopping syringe of truth serum, investors should stay away from the stock. This reformer not only must shed light on possible past abuses, he or she must stop the firm's frantic efforts to ship goods each quarter without regard for the damage it's been doing to the firm's balance sheet. Lucent shares fell 16% Tuesday, hitting yet another low.

Backtracking

Lucent announced Tuesday that it may have to reduce its already released earnings-per-share number for its fiscal fourth quarter by 11%. The reason? It may have overstated revenue in the quarter, ended Sept. 30, by $125 million. Lucent originally said in October that it had made 18 cents per share from continuing operations in the quarter. The firm now says it may have made 16 cents a share. That would mean the quarter was 33% below per-share earnings in the year-ago quarter, instead of the already abysmal 25% drop. Lucent also said it's withdrawing its already downbeat earnings and revenue guidance for the fiscal first quarter of 2001, issued at the end of last month.

Lucent CEO Henry Schacht, who in October replaced the distrusted Richard McGinn, said in a statement that the company wanted to make the possibly inflated revenue number public as soon as it discovered it. Lucent's auditor, PricewaterhouseCoopers, and its counsel, Cravath Swaine & Moore, are assisting the company in "doing a complete review of this and any related issues," added Schacht, who was CEO of Lucent from 1995 to 1997. Lucent is looking to replace Schacht, an interim chief, once the right candidate is found.

Lucent has also informed the Securities and Exchange Commission of these efforts.

It doesn't get much worse than this. Phantom revenue. Reduced earnings. SEC inspectors possibly crawling over the books. But they key question is: Why fess up now? Maybe Schacht, now staring at what McGinn did to his baby, has been motivated by anger to come clean. The worst scenario is that the firm is opening up because its auditor is finally getting tough. If that's the case, what should investors think of Hopkins, the CFO? If a new entrant like Hopkins wasn't able to resist the rot, then how will Schacht's replacement fare? Lucent said it couldn't make Hopkins available for an interview immediately.

Question Marks

Some Lucent watchers are already growling about Hopkins. Lehman Brothers analyst Steven Levy, who's been highlighting Lucent's problems for over a year, says the decision to rescind guidance "is starting to impact the credibility Hopkins might have." (Levy rates Lucent a neutral and Lehman hasn't done underwriting for the firm.)

Hopkins presumably signed off on the suspect fourth-quarter revenue, and she is cited in a press release giving the fiscal first-quarter guidance.

In addition, Lucent's desperate-looking attempts to get goods out the door have actually got worse under her term. Specifically, Lucent has shown little improvement in its attempts to speed up revenue collection and reduce its dependence on vendor financing, which is jargon for Lucent selling equipment to firms it is lending to. Accounts receivable (sales booked that the company hasn't received cash for) remain uncomfortably high. Days of sales outstanding (accounts receivable in a quarter divided by sales times 91, the number of days in a quarter) fell to 98 in the fiscal fourth quarter. But include vendor financing in the accounts-receivable tally and DSO goes up to 114, the same as in the fiscal third quarter, and higher than in the second.

If Schacht is behind this attempt to shed light on Lucent's recent past, then he's to be commended. He could easily have left the dirty work to his permanent replacement. But there's a dark possibility: Lucent's problems may be so dire that he couldn't keep them under wraps any longer.